Double Handshake

Don’t blink or you’ll miss the China-Argentina “soybean oil spat” playing out now, which was first reported last week after China stopped approving import permits for Argentinian soy oil imports, one of the countries’ most important trade products. At first, Chinese officials blamed malfunctioning computer systems for the canceled orders. Then, unofficial reports said the Chinese found residues of hexane, a solvent used in the milling of the crop, and blocked imports on health grounds. None of this fooled the wily press, however.

News reports of the “soybean oil spat” concluded that the move was nothing but the latest governmental brinkmanship in an ongoing low-level trade dispute between the two countries. After all,  Argentina is currently carrying out an anti-dumping investigation on Chinese goods like textiles and steel pipes. Last year, President Kirchner imposed new import tariffs on Chinese manufacturers to stimulate “healthy competition” between cheap Chinese imports and local companies that have been undercut. In turn, China – which, let’s face it, wasn’t going endanger its petrol oil imports from Argentina – crimped soybean oil imports this month in retaliation.

It’s a compelling explanation, and I agree that it plays a role. But it doesn’t tell the whole story.

A less-reported angle to the China-Argentina soybean oil trade dynamic is the fact that China itself is dealing with a record stockpile of edible oil, not only soy oil, but palm oil and rapeseed oil as well. On top of this surplus, China has been busy stockpiling both domestic and imported soybeans, which it sources from the US and Brazil in addition to Argentina. China can then crush the beans in-country to make its own soy oil, an industry that is currently operating at just half its 94 million-tons-per-year capacity.

In other words, with so much edible oil already sloshing around China, its soy oil imports from Argentina might have been curtailed anyway.

Still, though China’s edible oil stockpile can soften the blow of halted Argentinan imports, it can’t come close to meeting domestic demand by itself. Even if the country does eventually ween itself off edible oil imports, Argentina will still be there to supply the raw commodity. From the Reuters report:

China has not clamped down on soybean imports from Argentina, from where it is estimated to have bought some 2 million tonnes for April-May delivery, as stopping beans would hurt its domestic crushing industry.

“They can’t touch soybeans because China has become too dependent on soy,” the Singapore-based trading manager said. “The factories will be shut if you restrict beans, but they can use bean oil to settle scores as they have enough stocks.”

Analysts and pundits are divided on how long the spat will last. I predict a prompt fizzle to the whole thing in the next few months as China works through its domestic supply. China and Argentina are the world’s biggest consumer and producer of soy oil respectively. The economic pressures are too great for this to get out of hand.

Image: Naturea2z.com

I was reading about the weird and intriguing (and for purposes of this blog, not so relevant) theory of geological hot spots in Al Gore’s great climate change primer Our Choice, and it got me thinking. The (still unproven) idea is that areas of the earth’s surface that are unusually hot, such as Old Faithful at Yellowstone National Park in the US, can be explained by large asteroid strikes in the ocean at the corresponding place exactly on the opposite side of the world. This point, 180 degrees away, is called an antipode.

This made me remember growing up in the US and occasionally hearing grownups say “if you dig a hole straight through the earth to the other side, you’d be in China.” This, I can confirm with this nifty Antipode Map, is not the case. America’s whole collective anitpode is out in the south Indian Ocean (exception: Hawaii – you’re in Botswana!)

But it turns out that China and Latin America have some serious antipodean matching going on. John at the great Sinosplice blog apparently figured this out three years ago:

So you can see that China mostly just overlaps with Argentina, and most countries don’t overlap with any land at all. According to another website, China gets these exciting antipodes match-ups:

1. Beijing – Bahia Blanca, Argentina
2. Taipei – Asuncion, Paraguay
3. Shanghai – Buenos Aires, Argentina
4. Wuhan – Cordoba, Argentina
5. Xi’an – Santiago, Chile

Some of them are give-or-take a few hundred kilometers according to the map but still cool approximations to know.

Back in October, I posted a snippet of a Shanghai Daily article relating to Chile’s pavilion preparation for this year’s Shanghai Expo:

At the Shanghai event next year, Chile will attract visitors with three special wells. People will be able to look into the wells in the pavilion in Shanghai to see scenes and hear the sounds of some Chilean cities on the opposite side of the earth.

It still sounds hokey, but I guess now more credible than the “digging a hole to China” silliness I thought of when I first heard about it – even if those scenes and sounds are technically coming from Argentina.

Image: Sinosplice

A few noteworthy links from around the web (a few that I’ve had on my desk for some time now). With a little down time in the coming weeks, I’ll hopefully give a few of these stories their proper treatment. But, for now, the short list:

Bloomberg reports that newly christened 2016 Olympic city Rio de Janeiro is looking to China to help finance the its planned US$11 billion in Olympics-related infrastructure projects. (China knows a thing or two about the topic). State-owned China Development Bank loaned Brazilian state-owned oil giant Brasileiro SA US$10 billion earlier this year.

On the subject of oil, the Latin Business Chronicle republished an article from the Wharton Business School on China’s quest for oil in Latin America. Buried half-way down in the piece is a good breakdown of China’s proposed deal to buy Argentinean oil exploration and refining firm YPF for around US$17 billion – which would be the largest-ever overseas deal by a Chinese company.

R. Evan Ellis, whose book China in Latin America: The Whats and Wherefores has been reviewed nicely here, published another exhaustively cited bird’s eye view of what China’s presence in Latin America means for the US earlier this month for the Jamestown Foundation’s China Brief.

Two of his four main claims raised an eyebrow for me: “[China] is enabling the survival and spread of regimes oriented against the United States, Western-style democracy and economic models” and “[China] is undermining the United States as a source of political and economic influence in the region, as well as U.S. options for regional engagement.” Ellis takes pains to point out that China is, of course, not directly undermining democracy and US influence, but rather propping up the economies and the political lives of leaders like Hugo Chavez and Rafael Correa with its investment and trade dollars. Still, should we be alarmed or is Ellis being alarmist? Is the US’s capacity for “regional engagement” actually hindered by China’s presence or is the US simply in less of a position of power?

Chile is the only South American country to commit to its own pavilion at next year’s Shanghai Expo, spending US$6 million on construction rather than renting, according to Shanghai Daily. Fear not: Easter Island will be represented at the Chilean pavilion, as will this groan-inducing design idea:

At the Shanghai event next year, Chile will attract visitors with three special wells. People will be able to look into the wells in the pavilion in Shanghai to see scenes and hear the sounds of some Chilean cities on the opposite side of the earth.

Finally, here is a new trilingual corporate blog from the newly launched SinoLatin Capital, which specializes in China-Latin American investment deals. The blog got off to a roaring start in August, but posts have since grown a bit infrequent. I can relate. There’s more to be written about SinoLatin Capital, but for now, find some background on the company here.

First off, apologies for the major drop-off in posting on DH lately, things should pick up again in the fall when I’m more settled in my new home in Beijing. Nevertheless…

Latin America and Africa are often lumped together when talking about China’s interest in them – namely, as two gigantic sources for natural resources. While many of the billion-dollar trade and investment deals have been made in oil and mineral resources to keep the furnaces back in China blazing, agricultural resources are also included. China has had a national policy for 95% food self-sufficiency in place for some time, but with 22% of the world’s population (eating increasingly more and more) and only 7% of the world’s arable land, China is looking abroad as it stares down some frightening food-supply pressures.

Unlike the last wave of Chinese agriculture investment abroad (in the 1990s, largely to Southeast Asia), Chinese companies are now flocking to southern Africa to buy up and develop fertile African farmland to grow food for export. By 2007, China had 63 agricultural investment projects in southern Africa, and last year, Beijing promised US$800 million to modernize Mozambique’s agricultural sector. Loro Horta wrote a good overview of the situation for the Jamestown Foundation earlier this year.

But what about Latin America? With some of the world’s richest agricultural regions in the Argentine Pampas, is China buying up farmland there as well? Apparently not.

Reuters published an interesting article last month about China’s noticeable non-interest in buying up Latin American farmland in the same way it has in Africa.

Land prices and mature farming markets in Brazil and Argentina, the engines of Latin America’s commercial farming, make investments in big production projects less of a bargain for China.

“China’s ideas about farm prices are very different from the reality in Argentina’s Pampas. They think they can buy good farmland for $1,000 per hectare.” said Ernesto Fernandez Taboada, executive director of the Argentine Chamber of Commerce for Southeast Asia.

The best Pampas land costs up to 10 times that much.

—

“They wanted to enter but couldn’t after they realized what kind of investment it would take to have their own local infrastructure and logistics to control production,” said Carlo Lovatelli, president of Brazil’s grain crushing association Abiove.

The complexity of local farm markets makes it difficult to guarantee that the products of Chinese investments in food here would make it efficiently to China’s ports.

“Today China is offering financing and access to cheap labor, neither of which Brazil especially needs,” said emerging market analysts Trusted Sources in a report.

Local growers are closely integrated with trading companies, which provide credit and inputs like seeds, agrochemicals and fuel. Producers, already carrying heavy debt loads, have little need for additional financing. They also have ample directed government credit.

In Africa, Chinese financing goes a lot farther. The Asian nation also has been allowed to deploy one of its competitive advantages in Africa – low-paid Chinese workers. Entrenched Latin American labor interests would not permit that.

Instead, China has bought Latin American agricultural products (especially Brazilian soybeans) directly. This is possible because soybeans are a major exception of the 95% food self-sufficiency policy described above. According to Reuters’ article, China buys 65% of the world’s seaborne soybean trade, making it the country’s number one import from Brazil.

So, while China may not be buying up Latin American agricultural land directly, Latin American is and will continue to play a major role in what ends up on Chinese dinner tables. Should China’s food self-sufficiency policy start causing hunger pangs (as it may already be doing) – and Beijing open up the country to more agricultural imports – look to the sprawling estancias of Brazil and Argentina to play a major role in becoming China’s “new rice bowl.”

The billion-dollar Chinese investments in Latin America are flying; I can barely keep up. Today, The Wall Street Journal reports (subscription needed) two state-owned Chinese oil companies – China National Petroleum Corp and China National Offshore Oil Corp (Cnooc) – have proposed paying at least US$17 billion for a majority stake in Argentina’s biggest oil company, YPF. The two Chinese firms want to buy an 84% stake in the Argentine unit from its beleaguered Spanish parent, Repsol YPF.

This is literally and figuratively a big deal. If successful, it would be China’s biggest-ever overseas investment. The current largest Chinese investment happened last year, when mining firm Chinalco, along with US-based Alcoa, bought a US$14.3 billion stake in Anglo-Australian firm Rio Tinto.

However, in June this year, Chinalco made moves to buy another US$19.5 billion in Rio Tinto, but the deal collapsed because of shareholder and political pressures. On the oil front, Cnooc bid US$18.5 billion for US oil firm Unocal back in 2005, a deal that was scuppered by US congress. There are plenty of other overseas Chinese investments that have gone a rye.

The central sticking point: When it comes to country’s strategic resources, how much Chinese ownership is too much? The answer varies by country, political climate and desperation of the seller. In Argentina’s case, Repsol YPF has been hit hard by the global slowdown and needs cash to pay off its US$14 billion debt. Argentina’s government does not own any of YPF but has the right to veto important transfers of ownership like this deal. If Buenos Aires decides that Chinese ownership would too greatly affect oil pricing and supply at home, the deal may be canned.

We’re a long way from knowing whether or not this deal will clear all its hurdles, but even if it does, is it a smart investment? Some question why China would go to Argentina to secure energy sources at all. From the WSJ’s Environmental Capital blog:

China is spending billions to gain access to energy resources around the world, from gas in the Middle East, gas and oil deals with Russia, offshore oil deals with Brazil, and more.

But the possible YPF deal is odd, because Argentina’s oil fields are old and tired. Repsol has seen production of both oil and gas fall every year recently, even as production costs have risen. As YPF noted in a securities filing:

“Argentina’s oil and gas fields are mature and our reserves and production are declining as reserves are depleted. In the last two years our proved reserves declined by approximately 20%, and we replaced 51% of our production with new proved reserves during 2007; average daily production in 2007 declined by approximately 4.1% from 2006. We are engaged in efforts to mitigate these declines by adding reserves through technological enhancements aimed at improving our recovery factors as well as through deepwater offshore exploration and development of tight gas. These efforts are subject to material risks and may prove unsuccessful due to risks inherent to the oil and gas industry.”

Zhou Xiaochuan, the head of China’s central bank, has been one of the headline-grabbers from the Inter-American Development Bank (IDB) summit, which is wrapping up today in Medellin, Colombia. Zhou was the new guy at the meeting; China only became a member of the IDB in January, shelling out a US$350 million loan to join.

Zhou swallowed his butterflies and made his first address at the meeting, duly talking about the “huge potential” in China-Latin American trade and cooperation and reeled off some eye-catching statistics: 30% annual growth in bilateral trade since 2001, from US$15 billion to US$140 billion.

Earlier in the week, Zhou made waves by voicing his concerns about the US dollar’s supremacy as the global currency, proposing that the International Monetary Fund consider adopting a basket of currencies to replace it as “super-sovereign reserve currency.” Barack Obama didn’t warm to the idea, but US Secretary Treasury Timothy Geither seemed to. Presumably Zhou and Geither had a bit of time to discuss it further in the de-Pablo Escobar-ed setting.

As if to drive his point home, Zhou announced a US$10 billion currency swap (that is, US$10 billion-worth of yuan and pesos) between his country and Argentina at the IDB meeting. It is the first currency swap between China and a Latin American country. Argentina has an election coming up on June 28, and having the extra funds will give them a measure of security in controlling the peso’s value.

Argentina’s central bank president, Martin Redrado, was quick to point out that the deal is a contingency plan; the country doesn’t need it at the moment. And, another asterisk behind the deal:

“The fact that China represents such a small share of Argentina’s total trade (less than 12 percent) suggests limited impact on FX, but is an important political gimmick at this time (convertibility will remain an issue),” RBS wrote in a research note issued on Tuesday.

Gimmick or no, Zhou proved that even in an international setting like the IDB summit, China will look for ways to extend its reach (and currency priorities).

Image: China Daily

The always-admirable Danwei.org just published a good piece on the Chinese diaspora in Argentina, by guest writer Nancy Liu, a health researcher and NIH/Fogarty Scholar in Buenos Aires. Liu describes the scene in the city’s Barrio Chino (Chinatown) during the Olympics and goes on to write about the differences between the three waves of Chinese immigration to the country: The first arriving from Taiwan in the 1980s with dashed hopes of reaching the US, the second coming from Fujian province in the 1990s, and the third and most recent – educated, middle-class workers working two-year contracts for Chinese companies operating in Latin America.

While the first wave has largely acculturated after 20-some years in the Argentina, Liu notes that many arrivals from the second wave are still working to pay off their immigration debts. A few years ago, The New Yorker published a fantastic article by Patrick Radden Keefe on the underworld of human (largely Fujianese) trafficking to Chinatowns in the US in the 1990s. Both “Snakeheads” and Danwei’s “Chinese in Argentina” are well worth the time.